You can count me skeptical when it comes to whether € credit is going to be able to accept the wind down of CSPP with relative alacrity.
I know some of my more sophisticated readers would tell me I’m preaching to the choir when I say that, but there’s still a sizable contingent out there that seems to think it’s somehow going to be possible to remove that ongoing bullish technical from a market that, broadly speaking, is priced to perfection without everyone suddenly deciding to take a closer look at whether they’re being compensated adequately for bearing credit risk.
I’ve obviously talked about this a ton in these pages, but I was thinking about it over the weekend in the context of Italy and I think one thing that’s worth considering is whether the potential exists for a kind of “double whammy” scenario where the relative weighting of Italian credits at the index level ends up causing problems at a time when spreads are set to lose the technical tailwind from CSPP.
This was the same conversation folks were having last year in the run up to the French elections and it was an even bigger deal there given that at the time, there was something like €400 billion in French corporate debt out. That compares to roughly €110 billion of Italian IG and €48 billion of Italian HY as of earlier this year.
So while the sheer amount is smaller, we’re now closer to the end of CSPP than we were headed into the French elections. And again, I guess I wonder whether there’s some endogeneity going here, where CSPP is keeping € credit calm at a broader level and that calm is at least a little bit dependent upon periphery debt not reflecting political risk which is itself a function of CSPP’s influence.
If everyone is being honest, it’s impossible to answer the questions implicitly and explicitly posed above ahead of time.